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The phrase “corporate criminals” evokes images of the high-profile financial meltdowns at Enron, Worldcom, and Tyco, as well as the subsequent convictions of those corporations’ top officials. Criminal liability and jail time are not just reserved for jet-setting executives at Fortune 500 companies, however. Managers in the oil, gas, and propane industries face the potential for civil and criminal sanctions from a wide variety of state and federal statutes. Given the often-complex web of laws governing these industries, some of which are codified as criminal statutes, well-meaning executives could find their company, or themselves, subject to criminal prosecution. In a nightmare scenario, an energy executive could find himself with a criminal record—or even behind bars.

That was the fate of Frank Hopf. Hopf was the former manager for Olympia Pipe Line Company at the time of a 1999 pipeline rupture that spilled approximately 236,000 gallons of gasoline into two creeks in Bellingham, Washington. When the gasoline ignited, it created a fireball that killed two ten year-old children playing on the riverbank. A fly fisherman was also killed when he was overcome by gasoline fumes and drowned. The subsequent investigation uncovered a host of statutory violations.

Hopf pled guilty and was sentenced to six months in prison, 200 hours of community service, and three years of probation for willfully failing to provide employee training as required under the Hazardous Liquid Pipeline Safety Act (“HLPSA”). Various individual and corporate defendants ultimately pled guilty or no contest to multiple criminal offenses, including violations of the HLPSA, the Clean Water Act, and the Rivers and Harbors Act. Olympic and its managing corporation eventually paid $112 million in criminal and civil penalties and for safety improvements.

Like many in his situation, Hopf wasn’t “the bad guy” so much as he was the official in charge of an operation with a lax safety culture. The victims’ families repeatedly expressed doubt that putting Hopf or other managers in jail would make a difference. The father of one boy told a reporter, “These guys are really victims of an industry. It’s the industry that needs to change.”

As this example vividly illustrates, what begins as an accident investigation can quickly become a criminal prosecution of a corporation and its officers based on management or regulatory failings. Though the violations might seem minor to management, in this post Sarbanes-Oxley world, a tragic outcome mixed with public demand for criminal accountability can add up to multi-million dollar criminal penalties and corporate officers spending time behind bars. Each of the following laws can carry criminal penalties for energy companies if not properly heeded:

OSHA: Created by the Occupational Safety and Health Act of 1970, the Occupational Safety and Health Administration (“OSHA”) is the federal government’s primary watchdog for workplace health and safety matters. OSHA works to meet its statutory goal of ensuring a safe and healthful workplace for all American workers by establishing workplace safety standards, conducting outreach and training programs for employers, and enforcing its standards through investigations and fines. OSHA’s jurisdiction covers employers across every sector of the economy, from doctors’ offices, to bakeries, to oil refineries.

What many oil and gas executives may not realize is that the law that created OSHA authorizes criminal penalties, including officer and supervisor jail time, in three different circumstances: 1.) any willful violation of an OSHA standard that causes the death of one or more employees (up to six months in jail for the first offense; up to one year in jail for subsequent offenses); 2.) making a false statement or certification in any record, application, or report required by OSHA (up to six months in jail); and 3.) giving any person advance notice of an OSHA inspection (up to six month in jail). The first two of these categories have been regularly prosecuted.[1]

One of the world’s largest oil companies, British Petroleum, may soon be facing criminal prosecution for OSHA violations for the March 2005 explosion at its Texas City, Texas refinery. The explosion, which killed 15 BP employees and injured more than 170 others, has been called the worst U.S. industrial accident in a decade.[2] The blast occurred as workers were starting up an Isomerization Unit, when a cloud of hydrocarbon vapors was somehow ignited. Most of the BP employees who died appear to have been working in temporary trailers sited dangerously close to the processing equipment at the refinery.[3] Despite knowing of the potential hazards, BP had failed to replace aging blowdown drums at its refinery with a more modern flare safety system.[4]

After first suggesting that its employees and not management were to blame for the accident,[5] BP has since acknowledged that poor management oversight and a moribund safety culture were the underlying causes of the accident. Despite BP’s official statement that it has “no evidence of anyone consciously or intentionally taking actions or decisions that put others at risk,”[6] OSHA referred the matter in December 2005 to the Department of Justice for potential criminal prosecution. Justice, along with the Environmental Protection Agency, is currently still considering potential criminal penalties. Any prosecution will come in addition to BP’s $21.4 million settlement with OSHA for civil violations, and the $1.6 billion BP has set aside to resolve the 1,700 civil lawsuits that were filed after the blast.[7]

DOT: The Department of Transportation (“DOT”) also plays a significant role in the federal regulation of oil and propane companies, including the ability to assess criminal penalties. Specifically, DOT sets and enforces the Hours-of-Service regulations, which regulate the maximum hours that tractor trailer operators can drive without taking time off-duty. In addition, the Office of Pipeline Safety (“OPS”) is a division within the DOT. OPS serves as the federal oversight agency for the 2.3 million miles of natural gas and hazardous liquid pipelines in the United States, and its investigations can lead to criminal prosecutions carrying significant fines and up to five years in prison per offense.[8]

Suburban Paraco Corporation found itself facing criminal prosecution related to DOT Hours-of-Service violations following a 1994 incident in which one of its tractor cargo-tank semitrailers veered off of Interstate 287 in White Plains, New York, and slammed into the column of a highway overpass. The tank, which was carrying 9,200 gallons of propane, ruptured, sending a fireball more than 200 feet in the air. The tank hurtled the distance of a football field before striking and igniting a nearby house. Twenty-three people were injured in the explosion, and the driver of the tractor trailer, who had fallen asleep at the wheel, was killed.

The incident transformed from a tragic accident into a federal prosecution when investigators discovered the company’s divers had kept falsified time logs, allowing them to skirt DOT rest requirements. In fact, the driver killed in White Plains had slept less than three hours out of the previous sixty-five. Though there was no indication that Suburban Paraco management knew about the violations, they were held legally responsible for the forged records kept under their watch. Ultimately, Suburban Paraco pled guilty to the violations and paid a $1 million fine and agreed to five years’ probation.

State Fire and Building Codes: In many ways, just as the Enron scandal focused public attention on corporate financial crimes, the February 2003 fire at the Station nightclub in Rhode Island starkly demonstrated the danger of lax compliance with building and fire codes. The blaze, which killed 100 people and injured more than 200 others, began when pyrotechnics from a rock band’s stage show ignited polyurethane foam on the club’s walls. The club owners installed the foam as a soundproofing material following noise complaints from the club’s neighbors.[9] The use of the foam violated the fire code, but even the local fire marshal did not cite the club owners for the violation in a November 2002 inspection.[10] The nightclub’s owners, brothers Michael and Jeffrey Derderian, ultimately each pled guilty to 100 counts of involuntary manslaughter, with the former sentenced to four years in prison.[11]

In the months and years that have followed, Rhode Island and other states have strengthened their fire and building codes to include harsher criminal penalties for certain violators. Rhode Island enacted a tougher fire code, requiring all nightclubs and other “places of assembly” with occupancy capacities above specified limits—150 people and 300 people, respectively—to install sprinkler systems.[12] The law also removes the grandfathering provisions that formerly allowed owners of older buildings, such as the Station, to avoid complying with newer regulations.[13] Neighboring Massachusetts enacted a similar statute that included significant teeth: a criminal penalty of up to five years imprisonment for violations of the fire or building codes that led to a significant injury or death.[14]

Compliance with state gas codes and state fire codes is no longer a mere regulatory formality. Propane and natural gas appliance installers need to be acutely aware that a fire, explosion or carbon monoxide incident can now lead to criminal prosecutions and penalties, and not just the friendly reminder from the building inspector that used to be the rule. The Station fire illustrates an important point that all energy suppliers, installers and building owners should realize: when fatalities occur in a fire or explosion, such “harmless” or “routine” violations of fire and building codes can quickly become the prosecution’s legal ammunition to put owners, managers or officers in jail.

Sarbanes-Oxley: As most people now know, the wide-ranging provisions of the 2003 Sarbanes-Oxley legislation have serious implications for more than just Fortune 500 companies. In addition to the stricter reporting and executive certification requirements that Sarbanes-Oxley places on publicly-traded companies, the act also includes broader obstruction of justice penalties that can apply in the context of any federal investigation. Specifically, Section 802 of Sarbanes-Oxley authorizes imprisonment of up to twenty years for anyone who alters, destroys, or makes a false entry in any record or document in order to influence or obstruct an investigation of any federal agency. Further, Section 1502 of Sarbanes-Oxley amended the existing federal obstruction of justice statute to allow prosecution of individuals who shred documents in anticipation of a federal investigation.[15] Previously, this statute only allowed prosecution of conspiracies to destroy evidence before an investigation began, thus not covering the “sole shredder.”[16] This provision also carries a maximum term of imprisonment of twenty years.

Given the numerous federal agencies with the power to investigate oil, gas, and propane companies, the impact of these expanded evidence alteration and destruction provisions should be clear. In the Suburban Paraco case, for instance, federal prosecutors could have conceivably attempted to prosecute company drivers under the new Sarbanes-Oxley provision prohibiting knowingly altering records in contemplation of a federal investigation. Similarly, if individuals in a drivers’ chain of authority knew of such falsifications and attempted to conceal them, they too could face serious jail time under the enhanced Sarbanes-Oxley obstruction of justice provisions.

Be Smart and Don’t Take These Laws Lightly: Most executives and managers in the oil, gas, and propane industries are hard-working people, trying to make an honest living in an increasingly complex industry. The web of state and federal regulatory schemes that govern the operations of energy companies carry criminal penalties for serious violations. What might seem like minor or routine infractions can become extremely serious if your product or operations lead to the death of an employee or bystander. The best way to avoid these penalties is to work with counsel to understand as fully as possible your obligations under these laws, and take steps to avoid violations before they occur. Vigilance now can help avoid an unwelcome surprise later, when overlooked violations become the key to your prosecution.